Friday, June 5, 2009

Washington needs to get a grip on its exploding deficit or risk the United States' longer term recovery, the country's top banker said Wednesday.

Ben Bernanke, chair of the U.S. Federal Reserve, said the government will need to develop a plan to tackle the huge U.S. budgetary shortfall in order to make sure important programs such as Medicare are funded while keeping tax rates competitive.

"In particular, over the longer term, achieving fiscal sustainability — defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth — requires that spending and budget deficits be well-controlled," Bernanke said in testimony before a budget committee of the U.S. House of Representatives.

Looking ahead

Bernanke, who has been criticized for misunderstanding the depth of the current recession, did not gripe about the Obama administrations effort to re-inflate the U.S. economy by extra spending.

Instead, he pointed out that the country's deficit will hit $1.8 trillion in fiscal 2009, shrinking only to $900 billion within two years.

As a result, Bernanke estimated that the U.S. debt will equal 70 per cent of national GDP, up from 40 per cent during the period prior to the financial meltdown in late 2008.

"These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II," he said.

The dilemma Washington faces, however, is that while the economy's descent appears to be slowing, any turnaround is still months away, Bernanke said.

"The most recent information on the labour market — the number of new and continuing claims for unemployment insurance through late May — suggests that sizable job losses and further increases in unemployment are likely over the next few months," he told Capitol Hill legislators.

Job cuts — but fewer of them

Still, new data, also released Wednesday, appeared to reinforce the case that the U.S. economy is at least hitting bottom.

A report from Automatic Data Processing Inc. estimated that private sector employers cut 532,000 jobs in May,13,000 fewer than were dropped in April.

In addition, a well-followed survey by search firm Challenger, Gray & Christmas, said American employers had announced 111,000 job cuts in May. Similar to the ADP report, Challenger's numbers were down compared to April.

Analysts have interpreted smaller jobs cuts as a sign of easing economic weakness.